Auto ABS deals price with record-low money-market spreads

NEW YORK, Feb 17 (IFR) -

This was a week of firsts as six issuers, most of which are well-established names, priced their first deals of 2012.

Five of these transactions were in the auto space. Auto deals are still the main drivers of the ABS sector, and this past week’s offerings bring year-to-date total US auto ABS issuance to approximately US$15.02bn.

Year-to-date total US ABS issuance (excluding CLOs) is roughly US$25.4bn.

The overwhelming investor demand for the money-market tranches of the prime-retail auto transactions continued to increase this week, with market players reporting that the commercial-paper pieces of the Honda and Nissan deals were between seven and nine times oversubscribed.

Nissan’s money-market tranche priced at a 22bp below interpolated Libor, which is definitely a record-tight print for money-market auto ABS debt – both pre- and post-crisis.  

However, these extremely low prints are mostly due to the fact that three-month Libor has widened out considerably – to about 50bp – which, even by subtracting 22bp, is still a more attractive yield than alternative money-market products, according to bankers.

As for the A3 and A4 tranches of these transactions, there is just a great deal of investor capital to deploy right now, the bankers said, and there is investor comfort in moving out on the maturity curve. The Honda A3 and A4 tranches each were four to five times oversubscribed, reflecting the increasing amount of last-cashflow interest compared to late last year.

Given that there was hardly any product in the second half of fourth quarter 2011 – and the volatility surrounding the European debt crisis – investors decided to hold onto their money and close their books. Now that things have cooled down with Europe, the “risk on” mentality means that investors currently have a lot of money to put to work.

Bank of America (structuring lead) and Barclays priced the first offering of the year from Honda this past week. The deal was the US$1.693bn prime retail-backed Honda Auto Receivables 2012-1 Owner Trust (HAROT).

The Triple A rated classes consisted of average lives of 1.10, 2.20 and 3.06-years, and were talked at EDSF plus 10bp area, interpolated Swaps plus 22bp area and Interpolated swaps plus 30bp to 32bp.

Investor demand drove final pricing spreads tighter to 8bp, 18bp and 28bp, respectively. A money-market tranche was also priced at 19bp less than interpolated Libor after guidance was seen at minus 16bp to 17bp. The transaction was also increased from US$1.25bn.

The prior Honda transaction was the US$1.483bn HAROT 2011-3 series, which priced in mid-October 2011. The Triple A rated tranches of that transaction consisted of similar average lives and were printed at EDSF plus 9bp, interpolated Swaps plus 20bp and interpolated Swaps plus 32bp. The money-market tranche was priced at eight basis points less than Interpolated Libor.

Fellow prime issuer Nissan also tapped the market this week with the US$1.54bn Nissan Auto 2012-A series. The deal was led by JP Morgan (structuring lead), Credit Agricole and HSBC and was increased from an initial offering size of US$1bn.

The Triple A rated classes consisted of average lives of 1.10, 2.30 and 3.55-years, respectively. Price talk was seen at EDSF plus 8bp-10bp, interpolated Swaps plus 19bp area and interpolated Swaps plus 29bp area. Final pricing spreads firmed to 6bp, 15bp and 25bp, respectively. The money-market class was printed at a whopping record low (pre- and post-crisis) of 22bp less than interpolated Libor.

Ally was back in the market last week with its first dealer floorplan transaction of 2012, the US$750m Ally Master Owner Trust (AMOT) 2012-1, via the three-way lead of Barclays, Deutsche Bank and RBC. The collateral consisted of passenger vehicles as well as light and medium duty trucks (limited to 2.0% of the pool) inventory of dealers financed by Ally. The majority of AMOT is secured by new vehicles, with used vehicles representing approximately 11.0% of the portfolio. The deal is also said to have strong ageing distribution with only 3% inventory aged past 270 days.

The 2.98-year fixed and floating-rate Triple A classes were sized to demand and publicly offered. Guidance levels were seen at one-month Libor and interpolated Swaps plus 70bp-73bp. At pricing both spreads were softened to 80bp.

The Double A, Single A and Triple B rated subordinate tranches were offered as a 144a and consisted of the same weighted average lives. They were offered at interpolated Swaps plus 135bp, 180bp and 250bp.  A majority of the subs were heard to be sold, according to market sources. In the September 2011 AMOT 2011-4 transaction, the three-year Triple A fixed-piece priced at 90bp and the floater at 80bp. The subs of that transaction were not offered.

Wells Fargo was sole lead on the US$150m 144a American Credit Acceptance Receivables 2012-1. The deal was backed by sub-prime auto receivables and solely rated by Standard & Poor’s.

The Single A plus tranches offered average lives of 0.35 and 1.46-years, respectively, and were initially seen at EDSF plus 165bp-175bp and EDSF plus 265bp-275bp. Final pricing was set at 155bp and 255bp, respectively. The 2.48-year Double B slice was priced at interpolated Swaps plus 675bp after being talked in the area of 700bp. The 2.33-year Single A and 2.48-year Triple B classes were pre-placed.

Wells Fargo was also sole lead on the US$150m 144a sub-prime-backed First Investors Auto Owner Trust 2012-1. The 0.19-year class was priced at 15bp over interpolated Libor while the 1.66-year Triple A tranche was printed at EDSF plus 140bp. The 3.40 and 3.93-year Double A and Single A rated slices were priced at interpolated Swaps plus 210bp and 265bp, respectively. The Triple B and Double B rated notes offered average lives of 4.12-years and were stamped at interpolated Swaps plus 475bp and 600bp.

Credit Suisse (structuring lead) and Citigroup priced the first equipment floorplan transaction of the year for GE. The GE Dealer Floorplan Master Note Trust (GEDFT) 2012-1 was increased to US$750m from US$400m and included three tranches with weighted average lives of 2.99-years. The Triple A slice was the only tranche to disclose pricing at one-month Libor plus 57bp. It was originally talked three basis points wider in the 60bp area.                       
                                                                                     
The majority of the portfolio is secured by various types of equipment with power sports, marine, technology, lawn and garden, recreational vehicles, and consumer electronics and appliances, making up the majority of the portfolio, according to Fitch. The transaction comprises receivables associated with approximately 2,200 manufacturers, 24,000 dealers, and 13 separate product lines.

Adam Tempkin and Charles Williams

Reuters IFR: Tick-tock! US hastens crisis probes

NEW YORK, Feb 3 (IFR) -

Election-year pressures to deflect the anger of the “99%” – and a race against time to bring charges before statutes of limitations on crisis-era RMBS and CDOs run out – are spurring both the US government and private investors to push ahead with RMBS law enforcement and litigation, respectively, according to people close to the probes.

A surprise criminal indictment by the US this week of three former Credit Suisse traders – who artificially boosted the prices of battered RMBS in 2007 to earn higher bonuses – raised eyebrows across the legal community, both for its noticeable proximity to the formation of an Obama-administration federal RMBS fraud task force the week prior and the case’s strikingly easy targets: alleged rogue traders.

Given two of the traders’ plea agreements, this may be the first successful criminal indictment stemming from the financial crisis.

But the case also may foreshadow the fact that federal investigations are likely to focus far more heavily on actions taken by banks and ratings agencies to cover up their mistakes as the market was imploding in 2007 and 2008, rather than on the original assembly of toxic securities in the years prior, according to people familiar with the investigations.

This is partially due to the fact that statutes of limitation are expiring on the creation of the securities.

The DOJ and SEC civil probes into Standard & Poor’s, for example, focus far more heavily on the steps the agency took to address the crisis in 2007, rather than on the initial assignment of Triple A ratings in 2005 or 2006, insiders say, which was initially thought to be central to the investigation.

Still, the timing of the Credit Suisse trader charges last week took some by surprise. The incident has been public knowledge for four years, and the Swiss bank, whose early-2008 write-down of US$2.85bn was partially due to the alleged fraud, fired the individuals at that time. The bank itself is not a target at all, and the US Department of Justice has been investigating the case since 2008.

Fortuitous timing?

In addition to the DOJ indictment, the SEC revealed its own parallel civil case this week – which has also been in the works for years – prompting experts to ask why the charges are first being brought now.

“This is a strange prosecution to coincide with the Obama administration’s RMBS Working Group. How fortuitous the timing is,” said Isaac Gradman, an attorney who has brought legal action over mortgage bonds.
“What’s more, this isn’t really the typical fraud you’d expect to prosecute from the crisis. These are three rogue traders who defrauded their institution, and were disciplined by their institution back in 2008,” he said. “The RMBS Working Group, on the other hand, pledged to look under every rock and down every avenue to go after the financial institutions that assembled toxic RMBS. That’s not what this is.”

While this rare criminal indictment may be hard for federal enforcers to repeat, there is bound to be an uptick in both civil and criminal charges related to the financial crisis in 2012, experts say. Last Friday, the DOJ issued civil subpoenas to 11 financial institutions as part of the RMBS Working Group's pursuit of cases related to the sale of mortgage bonds and CDOs in the run-up to the crisis.

Although the SEC can only pursue cases where there are violations of civil laws, it is likely that they will refer several cases with possible criminal elements to the DOJ, insiders say.

Taking its Toll

There has also been acceleration in MBS litigation brought by bondholders or civil actions brought against banks by states due to the short statute of limitations.

“Given that most of the deals were created in New York, the conservative attorney will look at the state’s six-year limitations period both for breach of contract and fraud. But every state is different,” said another prominent structured finance litigation attorney who has represented investors. "These private civil RMBS lawsuits have only really exploded last year."

But statutes of limitation have become a thorny point of contention between plantiffs' attorneys representing competing groups of RMBS investors. There have recently been many creative attempts by various legal teams to get around the statutes, Gradman said.

Some lawyers try to take a more liberal approach, hoping to extend the timeline.

For instance, in the context of loan putbacks to banks, some attorneys take the view that each time an investor tries to enforce putback rights, and the bank refuses, a new breach of contract occurs, and the clock starts ticking anew on the statute of limitation. Others say that if an investor wants to initiate litigation, it should be done six years (in New York) from when the deals close.

Confusing the issue even more is the uptick in plaintiffs asking defendants to "toll" the statutes, which means that the parties agree to stop the clock temporarily on the statute of limitations so that they can possibly negotiate a settlement.

This "time out" has become much more common in private lawsuits, sources say, but can happen in both civil and criminal cases, as well as in federal or state-led probes.

Since plaintiffs may be running out of time to bring their cases, defendants are typically eager to "toll the statute", or stop the clock, lest they be taken to court immediately. It buys them time to negotiate.

However, it's not always easy for lawyers to discover the existence of tolling agreements. Therefore, for example, one might assume that RMBS created in 2005 might be immune to prosecution at this point, but because of several tolling agreements in existence, the timeline has been suspended, and ultimately, extended.

What's more, as the timeline increases, the losses to investors increase as well. Therefore, knowledge of the existence of tolling agreements can affect how investors' attorneys size the losses taken on a bond.

However, it is impossible to toll a statute that is already expired.

The federal advantage

The statute of limitations for federal securities fraud, meanwhile, is typically five years, but at least part of the motivation for elevating the pursuit of RMBS fraud to the federal level with the formation of the RMBS Working Group was to take advantage of longer statutes of limitations.

Banks and other financial institutions have special protection under federal criminal laws: various types of bank fraud may have 10-year statutes of limitation, particularly if banks were affected by the deceit, as Credit Suisse was.

While it's not clear whether the 10-year statute will apply to all of the Working Group's cases, federal authorities typically operate under US securities laws when engaging in enforcement, and are not encumbered by the same restrictions imposed under the state, lawyers said.

“The federal laws may have longer statutes of limitations than the state laws," said Robert Anello, a white collar defense attorney at Morvillo Abramowitz. "Either way, as statutes get closer, the government, as well as private investors, are going to pull the trigger this year."

Adam Tempkin

adam.tempkin@thomsonreuters.com

Reuters IFR: ASF 2012 - ASF sees Europe looking to secured funding

LAS VEGAS, Jan 23 (IFR) - 

    Many European institutions are looking to secured funding -- both securitization and covered bonds -- to fund themselves, according to Robert Plehn, managing director and head of ABS Solutions at Lloyds Bank Corporate Markets, speaking Monday about the impact of the European debt crisis at the annual American Securitization Forum (ASF) conference in Las Vegas. 

   With nearly 5,000 market participants in attendance this year, the conference is seeing conversation focused on the sovereign debt crisis. 

   "Secured funding is replacing unsecured funding as a way for institutions to fund themselves," Plehn said, while cautioning: "You can't make generalizations about asset classes anymore. You have to look through to the assets." 

   Vishwanath Tirupattur, managing director at Morgan Stanley, said that from a secondary market perspective, the reason for the sale of secured finance assets by banks in Europe is risk-weighting, not asset quality. 

   Therefore, he said, the European assets being sold by banks are the "ultimate value play" for investors willing and able to tolerate some shorter-term volatility. 

   At the conference's opening general session, attendees were cautiously optimistic about a slowly improving US economy over the next 12 months. However, the general consensus was for global ABS issuance to remain flat in 2012. 

   One panelist, Reginald Imamura, executive vice president at PNC, was encouraged by the liquidity beginning to flow back into the mainstream economy.  

   He said he has seen "pockets of improvement", including auto spreads returning to pre-crisis levels and CLOs beginning to re-develop. But he also noted that the struggles of private-label non-agency RMBS will linger throughout the year. 

   Doug Murray, managing director at Fitch Ratings and moderator of the panel, said Europe is the "ultimate wild card" in how the year plays out. 

   The recovery in the U.S. is much more solid than in Europe, added Ganesh Rajendra, head of international asset and mortgage-backed strategy at RBS Securities in London. 

   The European region is likely to contract for two straight quarters, leading it back into a recession, he said. However, the United Kingdom would remain recession-free and only contract one quarter, with moderate growth later in the year. 

   The continental European recession will be caused by the trouble spots of Greece, Portugal, Ireland, and "the big elephant in the room, Italy", he said. 

   Rajendra believes Greece will technically avoid a default but said that even if it did occur, it has already been priced in by most in the market. 

   High-quality vanilla European ABS transactions should not be affected by the turmoil, he said. 

   When asked what the major discussions of ASF 2013 will be, panelist answers varied. Ronald Mass, a portfolio manager at Western Asset Management, wants to see investor rental housing loan transactions. He sees a real market developing as homeowners sell off property and begin to rent.  

Amy Resnick, Charles Williams, Adam Tempkin

Reuters IFR: ASF 2012 - Feel good story for U.S. auto ABS

LAS VEGAS, Jan 24 (IFR) -  
    A good story coupled with a solid 2012 outlook highlighted the annual "Auto Loan and Lease ABS Sector Review" panel at ASF. Mark Stancher of JPM Investment Management referred to 2012 as the "start to normalization" as regulations start falling into place. There could also be a buildup in warehouse facilities that could provide the beginning for new issuers both domestic and abroad to enter.

     Panelists are estimating new vehicles sales to be anywhere from low 13m to 14.5m this year. Used car prices are also strong and are expected to remain that way throughout the year.

 

    Matthew Peters, a MD of securitization at BMO Capital Markets, referred to autos as "the benchmark class" with plenty of access to credit. As credit card issuance dwindles and student loan transactions conform to new changes, autos have become the establishment of U.S. ABS. Mark Stancher expects a 10% increase in new issue auto-related volume, which totals between $75-80bn or 60% of total market volume. Historically, autos have accounted for only 25%, but that is now a thing of the past. 

 

    The success of the sector can be attributed to a strong consistency of quality loans. The dealer floorplan segment was also highly recommended as inventory has become more carefully managed. Although the market came out of the crisis in good shape, Peters believes sponsors of autos have become a lot smarter than they were pre-2007-2008.

 

    While 2011 was highlighted by demand for short term paper, panelists feel this year will see an increasing bid for A3 and A4 classes. 2011 was also a good year for auto leases, which were supported by strong residual values. Stancher was also encouraged by credit enhancement provided by subprime or "high yield" autos as it is becoming to be known. Both issuers on the panel, Eric Gebhard of World Omni Financial Corp. and Jason Behnke of Ford Motor Credit Company, expect subordinate bonds to be an important part of the capital structure. Ford's recently completed retail transaction sold both seniors and subs for the first time in about a year.

 

    In terms of regulation, Rule 193, which relates to the due diligence process is not considered to be a major impediment for autos. Behnke said the main difference is they now use pool specific contract testing, which does increase cost. As an investor, Stancher believes the document language won't be much different. Gebhard felt in addition to driving up costs, the regulation is too complex. In terms of loan level disclosure in Reg AB II versus the old grouped data, opinions were varied as to what was most beneficial. On the issue of risk retention, issuers feel a vertical slice retention is too redundant. Ford already takes a first loss position on its deals.

 

    Stuart Litwin, moderator and Partner at Mayer Brown, thinks over-regulation is not necessary in a safe haven sector such as autos. Rule 17-g-7 regarding rating agency reports was his prime example.

 

charles.williams@thomsonreuters.com

Reuters IFR: ASF 2012 - Bankers discuss unintended consequences of complex regulations

LAS VEGAS, Jan 24 (IFR) -   

      Participants in the asset securitization market warned yesterday that the complexity of the regulatory regime being implemented from the Dodd Frank Act and by European regulators could stymie the recovery of the US mortgage market, despite that recovery being their goal.

    Speaking at the Asset Securitization Forum 2012 conference at the Aria in Las Vegas on Monday, the group of attorneys, bankers and policy advisors suggested that regulators would be more successful if they focused on getting a broad brush framework on the books, rather than write rules specifically aimed at preventing the last crisis.

     Reed Auerbach, a partner at law firm Bingham McCutchen, said regulators should "leave deals alone that worked."

     "Many would (work),  if regulators did not put all asset classes in the same boat as the mortgage business,” he added,  pointing to the ongoing functioning of securitization for auto loans and other assets.

    He warned, “Markets that are functioning can become dysfunctional” when subject to regulation tailored for problems they did not experience.

    Several speakers referred to a recent paper by Karen Petrou, co-founder and managing partner of Federal Financial Analytics, which analyses regulations for banking and other clients. Petrou’s paper, published in November, outlined the significant costs of complexity risk.

    "Complexity risk creates unintended consequences and so much uncertainty that banks have largely headed for the bunker, fearful that the next rule will contradict the last proposal and pose capital, liquidity, legal and reputational risks compounding those already facing the firm under current, tough market conditions," Petrou wrote.

    "We have concluded that what we call complexity risk – the burden on financial institutions and regulators of complex, cross-cutting and sometimes incomprehensible rules – may well now be the most significant impediment to financial-market recovery and robust economic growth."

    Such risks, said panelist Lydia Foo, an executive director at Morgan Stanley, could result in banks and other issuers turning to other markets outside of securitization for financing.

    "The regulatory burden must be weighed against other ways of financing those assets," she said. "We need to make sure it works for issuers."

amy.resnick@thomsonreuters.com

Reuters IFR: ASF 2012 - Regulations, data, high costs prevent full return of private RMBS

LAS VEGAS, Jan 24 (IFR) -

    As Tom Petty wrote in one of his many popular songs, “The waiting is the hardest part.”

     Waiting is exactly what the market will have to do before private-label non-agency RMBS can once again become fully functional, according to panelists at the “RMBS RESTART” panel at ASF 2012 at the Aria in Las Vegas. The panel was designed to look at the prospects for and impediments to the next iteration of RMBS transactions.

    From a legal perspective, John Arnholz, partner at Bingham McCutchen, believes the RMBS market is in the final stages of re-regulation. He referred to risk retention as the “grand daddy” of regulation, which is still taking shape at the present time. Dodd/Frank, as well as GSE reform, are other issues to be watched, he said.

     From an economic point of view, only plain vanilla loans, whose performance is easy to predict, will come to market in the near term. “The economics of the execution of the market” must be right for a full recovery, according to Peter Sack, Managing Director (MD) at Credit Suisse. At this time rating agency models, as well as updated loan level analysis, have not yet been completed, leaving risk unclear for marginal loans, he added.

     Pamela Westmoreland of GE Asset Management was the sole investor on the panel. She said investor confidence in the market is broad-ranging. Some investors need a lot of reassurance while others are more focused on strictly risk versus return.

     As with Arnholz and Sack, the investor base also has to deal with regulatory issues. Westmoreland acknowledged that the mechanics of the deal must be clearly labeled in the documents and all parties involved with the transaction need to know who is taking what steps on behalf of whom.

     Patrick Greene, a MD at RiskSpan, Inc., is a proud supporter of ASF’s “Project Restart,” which in addition to the main goal of reigniting issuance, aims to solve the issue of how data is perceived and found among participants.

     Deal data means different things to different people and on top of that, finding the loan-level data on the SEC website is almost impossible. The latest RMBS transaction, Redwood Trust's Sequoia deal, which priced last week, began taking the incremental steps needed to address these issues. Only three or four deals are likely to tap the market in 2012.

     While open dialogue amongst the market is generally healthy, the unsolicited comments that can be offered from a rating agency not involved in a transaction could lead to anger from several parties and delay deal pricing. Investors who committed to the deal are likely to hesitate before final orders are placed, panelists said.

      The cost of doing deals will be higher than the peak issuance years of 2005-2006 and one of the key reasons is because of the infrastructure involved in creating a proper platform. Deal papers must also address repurchase issues and new proposed regulation may make private deals subject to the same procedures as public offerings.

     Westmoreland believes that problems of future RMBS transactions will not be the loose, freewheeling underwriting of 2005-2006, but something else that is yet to be known.

charles.williams@thomsonreuters.com

Reuters IFR: Bankers decry Fed's secrecy in Maiden Lane auction

LONDON, Jan 19 (IFR) -

• Fed chooses secrecy in new Maiden Lane II bidding process
• Strictly confidential, limited auction angers those left out ; Credit Suisse wins

A new, privately arranged process used by the Federal Reserve Bank of New York this week to accept highly confidential bids from only four broker-dealers for US$7bn of its Maiden Lane II portfolio raised the ire of other market players shut out of what they call a glaringly non-transparent strategy.
    Credit Suisse ultimately won the auction today, buying US$7.014bn in face value from the approximately US$20bn remaining in the MLII portfolio of distressed RMBS assets formerly owned by AIG. The portfolio originally had a face value of more than US$30bn, but about US$9.5bn was sold in a public auction process last spring that eventually fizzled and was halted indefinitely.
    "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed, in a prepared statement on Thursday.
    The latest auction was prompted by an initial reverse inquiry from Goldman Sachs, but the Fed opted to honor an original commitment it laid out in March 2011 to adhere to a competitive process to dispose of the former AIG-owned distressed securities. It therefore opened up the bid to a limited pool of market players.
    As IFR first reported last Friday, America’s largest regional Federal Reserve Bank took bids on the MLII parcel from only four banks: Goldman Sachs, Barclays Capital, Bank of America Merrill Lynch, and Credit Suisse. The auction was tightly under wraps when it started today, as the Fed required the dealers, as well their investor accounts, to sign strict non-disclosure agreements (NDAs) regarding the specific bonds and prices on the bid list.
    "I just don't see how running a limited participation secret auction ensures that the taxpayer receives maximum proceeds for their bonds,"; said Adam Murphy, the president of Empirasign Strategies LLC, a capital markets data provider. "This auction seems inconsistent with the more open Fed that Bernanke espouses.";
    At the height of the financial crisis, the Fed bought the securities in order to rescue AIG. It was Goldman Sachs' collateral calls on CDS insured by AIG that sunk the company. Even though it didn't ultimately win the auction, Goldman is viewed as the bank driving the latest burst of interest in MLII, given its initial reverse inquiry.
    The Fed's abrupt change of course towards a non-disclosed process irked many who were left out in the cold, according to several traders and asset managers. The strategy is in stark contrast to the more public tack taken last spring.
    The Fed sold US$9.5bn, or about one-third, of the more than US$30bn portfolio via nine auctions that took place between April 6 and June 9 of last year, but interest started to wane as the increased supply drove bond prices down and global macroeconomic volatility led to a vast de-risking event as investors dumped spread product.
    The Fed has long indicated that it never committed to any timetable or schedule for winding down the portfolio of former AIG assets, and was only looking to achieve the best execution possible.
    But now, secondary non-agency RMBS paper is on average 30 cents cheaper than last spring, spurring demand for the product once again.
     "This MLII thing is a mess,"; said one securitization specialist away from the four bidding banks canvassing the market in a struggle to find the bonds on the list. "(It's) A complete insider deal orchestrated by those responsible for AIG's collapse in the first place. Hedge funds have to sign an NDA just to see the bonds on the list."
    A spokesman for the Fed declined comment. However, a press release stated that the pricing for each bond will be disclosed three months after the last ML II asset is sold, "ensuring timely accountability without jeopardizing the ability to generate maximum sale proceeds for the public."

adam.tempkin@thomsonreuters.com